Exam 6: Differential Analysis: the Key to Decision Making

Dockwiller Inc.manufactures industrial components.One of its products, which is used in the construction of industrial air conditioners, is known as D53.Data concerning this product are given below: The above per unit data are based on annual production of 8, 000 units of the component.Direct labor is a variable cost. The company has received a special, one-time-only order for 300 units of component D53.There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order.However, assume that Dockwiller has no excess capacity and this special order would require 30 minutes of the constraining resource, which could be used instead to produce products with a total contribution margin of $1, 800.What is the minimum price per unit on the special order below which the company should not go?

Fabio Corporation is considering eliminating a department that has a contribution margin of $30, 000 and $60, 000 in fixed costs.Of the fixed costs, $15, 000 cannot be avoided.The effect of eliminating this department on Fabio's overall net operating income would be:

The following are the Jensen Corporation's unit costs of making and selling an item at its capacity of 1, 000 units per month: Present sales amount to 700 units per month.Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 700 units and 1, 000 units.Direct labor is a variable cost. An order has been received from a customer in a foreign market for 100 units.The order would not affect current sales.The variable selling and administrative expenses would have to be incurred on this special order as well as for all other sales.How much will the company's profits be increased or (decreased)if it prices the 100 units at $7 each?

In a special order situation, any fixed cost that could be avoided if the special order were not accepted would be irrelevant.

Vanikord Corporation currently has two divisions which had the following operating results for last year: Because the Rubber Division sustained a loss, the president of Vanikoro is considering the elimination of this division.All of the division's traceable fixed costs could be avoided if the division was dropped.None of the allocated common corporate fixed costs could be avoided.If the Rubber Division was dropped at the beginning of last year, how much higher or lower would Vanikoro's total net operating income have been for the year?

The following information relates to next year's projected operating results of the Consumer Division of Xampa Corporation: If the Consumer Division is eliminated, $1, 600, 000 of the above fixed expenses could be avoided.What will be the effect on Xampa's profit next year if Consumer Division is eliminated?

The Molis Corporation has the capacity to produce 15, 000 haks each month.Current regular production and sales are 10, 000 haks per month at a selling price of $15 each.Based on this level of activity, the following unit costs are incurred: The fixed costs, both manufacturing and administrative, are constant in total within the relevant range of 10, 000 to 15, 000 haks per month.Direct labor is a variable cost. The Molis Corporation has received a special order from a customer who wants to pay a reduced price of $10 per hak.There would be no selling expense in connection with this special order.And, this order would have no effect on the company's other sales. Suppose the special order is for 6, 000 haks this month and thus some regular sales would have to be given up.If this offer is accepted by Molis, the company's operating income for the month will:

An avoidable cost is a cost that can be completely eliminated irrespective of whether one chooses one alternative or another in a decision.

Hal currently works as the fry guy at Burger Haven but is thinking of quitting his job to attend college full time next semester.Which of the following would be considered an opportunity cost of attending college?

Cybil Baunt just inherited a 1958 Chevy Impala from her late Aunt Joop.Aunt Joop purchased the car 40 years ago for $6, 000.Cybil is either going to sell the car for $8, 000 or have it restored and sell it for $22, 000.The restoration will cost $6, 000.Cybil would be better off by:

A customer has requested that Gamba Corporation fill a special order for 3, 000 units of product Q41 for $25.00 a unit.While the product would be modified slightly for the special order, product Q41's normal unit product cost is $21.40: Direct labor is a variable cost.The special order would have no effect on the company's total fixed manufacturing overhead costs.The customer would like modifications made to product Q41 that would increase the variable costs by $7.00 per unit and that would require an investment of $15, 000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales.The company has ample spare capacity for producing the special order.If the special order is accepted, the company's overall net operating income would increase (decrease)by:

When a company is involved in only one activity in the entire value chain, it is vertically integrated.

Zuppa Corporation currently maintains its own printing department.The annual costs of running this department are as follows: Somatic Copy Service has offered to provide Zuppa with all of its printing needs at a total annual cost of $68, 000.If Zuppa went with this offer, they would close down their printing department.Except for 30% of the fixed costs, all of the annual printing department costs above can be avoided if it was closed down.Based on this information, would Zuppa be better off to keep its printing department or to shut it down and take Somatic's offer and by how much?

Juett Company produces a single product.The cost of producing and selling a single unit of this product at the company's normal activity level of 70, 000 units per month is as follows: The normal selling price of the product is $72.90 per unit. An order has been received from an overseas customer for 2, 000 units to be delivered this month at a special discounted price.This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs.The variable selling and administrative expense would be $1.10 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Required: a.Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $66.10 per unit.By how much would this special order increase (decrease)the company's net operating income for the month? b.Suppose the company is already operating at capacity when the special order is received from the overseas customer.What would be the opportunity cost of each unit delivered to the overseas customer? c.Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1, 300 units for regular customers.What would be the minimum acceptable price per unit for the special order?

A disadvantage of vertical integration is that by pooling demand for parts from a number of companies, a supplier will face diseconomies of scale that result in lower quality and higher cost than if every company makes its own parts.

The management of Bercegeay Corporation is considering dropping product Y25C.Data from the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system.Further investigation has revealed that $117, 000 of the fixed manufacturing expenses and $78, 000 of the fixed selling and administrative expenses are avoidable if product Y25C is discontinued. Required: a.What is the net operating income earned by product Y25C according to the company's accounting system? Show your work! b.What would be the effect on the company's overall net operating income of dropping product Y25C? Should the product be dropped? Show your work!

Weston Corporation is considering eliminating a department that has a contribution margin of $70, 000 and $140, 000 in fixed costs.Of the fixed costs, $100, 000 cannot be avoided.The effect of eliminating this department on Weston's overall net operating income would be:

Product Q77H has been considered a drag on profits at Zenke Corporation for some time and management is considering discontinuing the product altogether.Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products.Further investigation has revealed that $71, 000 of the fixed manufacturing expenses and $43, 000 of the fixed selling and administrative expenses are avoidable if product Q77H is discontinued.What would be the effect on the company's overall net operating income if product Q77H were dropped?

Joint products are products that are sold to customers as a set or as part of a group of products.

Gary Corporation produces products X, Y, and Z from a single raw material input.Budgeted data for the next month is as follows: If the cost of raw material input is $150, 000, which of the products should be processed beyond the split-off point?